Two years ago, Saudi Arabia and the other OPEC nations declared an oil war with America.
On November 30h OPEC will meet to admit they have lost that conflict.
At this month’s meeting OPEC will try to decide about the possibility of a global production cut or even a freeze in crude oil production in order to raise prices. The speculation about this conference is the fact that the production increase war failed and OPEC is on the verge of extinction.
The Saudi’s and OPEC thought by flooding world markets with oil, they could eliminate competition and also put oil companies in America out of business. Having done so, they would gain a larger market share and reassert their power to control global economies. There is no question that many people lost billions of dollars in this power play by the OPEC countries. The mistake that OPEC and the Saudis made, in my opinion, was the failure to understand the resolve of American oilmen. This foreign effort did shut down production, closed down a number of rigs drilling for oil, and in some cases, caused companies to go out of business. While successful in the short term, Saudi Arabia and OPEC may have paid a very high price for this war
On Thanksgiving Day 2014, Saudi Arabia and OPEC declared war on the American oil fracking industry. I watched as on that Thanksgiving Day, the price of crude oil dropped by almost five dollars a barrel. Later that weekend the Saudi oil ministry told us that they had declared war on American oil companies. They wanted to drive these upstarts in the Dakota’s and in other parts of the country out of business. I first wrote about this attack the following week, long before anyone else was writing about this new war.
Saudi Arabia, who was the leader of this war, didn’t count on the possibility that Saudi Arabia and many of the OPEC nations would see the devastation to their own economies. The revenue loss from the reduced sale of crude oil put enormous pressure on the financial reserves of all the OPEC nations. The International Monetary Fund, IMF, said earlier this year that a drastic reduction of oil revenue could create such a significant problem for Saudi Arabia that this once mighty nation could be bankrupt by the year 2020.
Other nations in OPEC like Venezuela and Nigeria are probably already bankrupt, and the remaining members of OPEC are rapidly moving towards their own bankruptcies if oil doesn’t get above $60 a barrel. The “Independent” projected that Russia, if oil prices continued to stay low, would run out of financial reserves by the end of 2017.
How ironic that just two years ago Saudi Arabia thought they could conquer the world by driving down prices, and now they desperately need prices to go up in order to have a chance of survival.
One thing that will not be talked about publicly at this meeting is Donald Trump and his election as President of the United States. I believe his commitment to making America energy independent as quickly as possible will impact the decisions of the OPEC ministers. In 2014 the Saudis said the reason they did not lower production was in order to protect their market share in the US. If Mr. Trump is correct, then the Saudis and the rest of OPEC will have no market share in the United States. With Mr. Trump in office, I have no doubt that American oil companies will increase drilling and production because the President will want them to compete for market share in the world markets. He will want American oil companies to compete directly with OPEC and Russia.
If Mr. Trump can convince American business to expand and if companies in other parts of the world could bring their companies to the United States, US energy companies will find new customers for their oil and natural gas. An increasing gross domestic product in the United States will create a demand for labor. People will go back to work and have the opportunity to compete for high-paying jobs that will further expand the US economy. The dollar is already at a 14-year high against the basket of foreign currencies. With increased economic activity in the United States, interest rates will increase while staying low in other parts of the world. We’ve already seen a 50% move on ten year yields. If the Federal Reserve raises interest rates in December, as many anticipate, look for the dollar to strengthen even further.
The spread between the yields on the US 10-year Bonds will widen and the dollar will increase in relation to the lower yielding currencies. As a result, money from nations all over the world will start flowing into the United States because the yields will be higher, our currency will be stronger, and economic opportunity will increase. So here we are, just about two years later, in a war that most Americans knew nothing about. Unlike the fighting in the Middle East with which we are still struggling, this undeclared war has been won. We didn’t have to put boots on the ground, and we didn’t endanger any military personnel’s lives, yet we defeated some of the wealthiest nations in the world.
Saudi Arabia is bringing to the market an equity offering, covering some ownership of their oil assets. They are doing this to raise money in order to fund their government operations, including trying to diversify away from oil. They need this offering to be very successful, and one of the factors influencing its success will be the stability of the price of oil. This particular offering has a high degree of risk for the Saudi government, as its price will track the price of oil. If the price of oil is unstable, the value of the asset will decline and investors will be very unhappy. If Saudi Arabia cannot stabilize the price of crude oil, it will be a long time before they can come back to the stock markets and offer additional investments in Saudi oil. It is possible that if the price of oil doesn’t stabilize many of the OPEC nations may no longer exist, as we know them today?
I think that some of the most recent run-up in the price of oil is the anticipation of new crude oil production levels. If the majority of the oil producing nations agree to these new cuts, I would expect to see the price of crude oil move quickly to the $52 to $55 range by the end of the year. After the first of the year, I would expect to see some downward pressure because of the significant short-term move up. But then I would expect some time in the first quarter 2017, an assault on $60 a barrel.
I believe the Saudi offering will now become the measure of what’s going to happen to the price of oil. Look for the announcement of the offering and put it on your watch list. In conclusion, let’s hope that Saudi Arabia and OPEC see the light and no longer make war on the American economy, a war they have already lost.
Dan Perkins is a current events commentator who writes for several blogs including, Constitution.com, The Hill.com, Reganbaby.com and others. He is the author of the trilogy on radical Islamic nuclear terrorism against the United States call The Brotherhood of the Red Nile. He co-hosts a nationally syndicated talk shows on W4CYradio.com. Dan’s web site is danperkins.guru.